{"id":677,"date":"2023-02-14T10:49:00","date_gmt":"2023-02-14T10:49:00","guid":{"rendered":"https:\/\/aurorasolardev.wpengine.com\/blog\/opportunity-zones-explained-a-helpful-solar-incentive\/"},"modified":"2024-07-17T18:44:55","modified_gmt":"2024-07-17T18:44:55","slug":"opportunity-zones-explained-a-helpful-solar-incentive","status":"publish","type":"post","link":"https:\/\/aurorasolar.com\/blog\/opportunity-zones-explained-a-helpful-solar-incentive\/","title":{"rendered":"Opportunity zones explained: A helpful solar incentive"},"content":{"rendered":"<p>Federal opportunity zones, which offer tax benefits to qualifying businesses, are little known and not always well understood. But they can offer important advantages to solar companies, adding to solar tax benefits such as the <a href=\"https:\/\/www.aurorasolar.com\/financial-incentives-for-installing-solar\/#ITC\" target=\"_blank\" rel=\"noopener noreferrer\">Federal Investment Tax Credit (ITC)<\/a>.<\/p>\n<p><!--more--><\/p>\n<p>&#8220;Opportunity zones were created to promote economic development in low-income communities by allowing companies to defer capital gains taxes,&#8221; said Roman Petra, attorney for Nelson Mullins who specializes in commercial real estate transactions.<\/p>\n<p>\u201cThe zones offer tremendous value for solar,\u201d said Jim Spano, a managing partner of Spano Partner Holdings, who has been involved in the development of more than 300 megawatts (MW) of solar. \u201cHaving a tax break in areas where economics don\u2019t support solar can provide lower cost of capital and opportunities for projects to pencil out.\u201d<\/p>\n<figure id=\"attachment_7267\" aria-describedby=\"caption-attachment-7267\" style=\"width: 600px\" class=\"wp-caption alignnone\"><a href=\"https:\/\/aurorasolar.com\/resources\/the-ultimate-commercial-solar-bundle\/?aurora_blog_cta=image\"><img decoding=\"async\" class=\"wp-image-7267\" src=\"https:\/\/aurorasolar.com\/wp-content\/uploads\/2019\/12\/Commerical-Solar-Bundle-CTA.jpg\" alt=\"\" width=\"600\" height=\"332\" srcset=\"https:\/\/aurorasolar.com\/wp-content\/uploads\/2019\/12\/Commerical-Solar-Bundle-CTA.jpg 714w, https:\/\/aurorasolar.com\/wp-content\/uploads\/2019\/12\/Commerical-Solar-Bundle-CTA-300x166.jpg 300w, https:\/\/aurorasolar.com\/wp-content\/uploads\/2019\/12\/Commerical-Solar-Bundle-CTA-320x177.jpg 320w, https:\/\/aurorasolar.com\/wp-content\/uploads\/2019\/12\/Commerical-Solar-Bundle-CTA-448x248.jpg 448w, https:\/\/aurorasolar.com\/wp-content\/uploads\/2019\/12\/Commerical-Solar-Bundle-CTA-508x281.jpg 508w, https:\/\/aurorasolar.com\/wp-content\/uploads\/2019\/12\/Commerical-Solar-Bundle-CTA-100x55.jpg 100w\" sizes=\"(max-width: 600px) 100vw, 600px\" \/><\/a><figcaption id=\"caption-attachment-7267\" class=\"wp-caption-text\">Click above to learn insights from commercial solar leaders, hidden growth opportunities you can tap into, and new features that can streamline your solar business.<\/figcaption><\/figure>\n<h2>Pairing solar benefits with opportunity zone benefits<\/h2>\n<p>Jeff Just, co-founder, along with Spano, of RadiantREIT, which provides financing for solar projects, added that locating a solar installation in an <a href=\"https:\/\/www.forbes.com\/sites\/jamesellsmoor\/2019\/07\/02\/opportunity-zones-drive-development-of-us-renewable-energy\/\" target=\"_blank\" rel=\"noopener noreferrer\">opportunity zone<\/a> allows businesses to double dip on tax benefits.<\/p>\n<p>\u201cThey get all the benefits of the zone \u2014 including permanent exclusion of future capital gains \u2014 while keeping all the tax benefits of solar&#8230; There are no limitations on pairing these two opportunities,\u201d he said.<\/p>\n<h3>How do opportunity zones work?<\/h3>\n<p>Developers who invest in economically distressed communities through the program are given <a href=\"https:\/\/www.jdsupra.com\/legalnews\/solar-development-in-opportunity-zones-33074\/\" target=\"_blank\" rel=\"noopener noreferrer\">three tax incentives<\/a>: temporary deferral, step-up in basis, and permanent exclusion of capital gains.<\/p>\n<p>With temporary deferral, investors can defer tax on prior capital gains reinvested in a Qualified Opportunity Zone. Investors also receive a step-up in basis for capital gains reinvested in a Qualified Opportunity Zone.<\/p>\n<p><a href=\"https:\/\/taxfoundation.org\/opportunity-zones-what-we-know-and-what-we-dont\/\" target=\"_blank\" rel=\"noopener noreferrer\">A higher basis means lower capital gains<\/a>. Under the program, the basis steps up by 10% if the investment is held for at least five years, and by an additional 5% if held for at least seven years.<\/p>\n<p>The third incentive, permanent exclusion, says that if held for at least ten years, capital gains from the sale or exchange of an investment in an Opportunity Zone may be permanently excluded from capital income.<\/p>\n<h3>Creating a qualified opportunity zone fund<\/h3>\n<p>To qualify for the Opportunity Zones program, investors must establish <a href=\"https:\/\/www.wellsfargo.com\/the-private-bank\/insights\/planning\/wpu-qualified-opportunity-zones\/\" target=\"_blank\" rel=\"noopener noreferrer\">a Qualified Opportunity Zone Fund<\/a>. This fund holds Qualified Opportunity Zone property.<\/p>\n<p>Many different types of taxpayers can establish an opportunity fund, including corporations, partnerships, limited liability companies, and individuals.<\/p>\n<p>Different segments of the solar industry can take advantage of opportunity zones, including solar equipment manufacturers that produce panels, inverters, batteries, battery charge controllers and components, and equipment that moves DC energy produced by solar panels for conversion into AC electricity, said Petra. Solar installers and solar farms also qualify.<\/p>\n<p>It\u2019s important to understand where the zones are located \u2014 and identify whether a solar business can take advantage of the zones, said Spano.<\/p>\n<h3>The importance of consulting an attorney<\/h3>\n<p>\u201cAs business people, we look at the definition of opportunity zones in geographic areas and the qualification requirements of the business,\u201d he said. Because it\u2019s not always easy to determine whether a business qualifies for the benefits, his company always consults attorneys. \u201cOur attorneys advise us about how to present our applications for qualification,\u201d he said.<\/p>\n<p>The eligible tracts for the zones are based on economic indicators of median family income and poverty, said Petra. States are limited to establishing zones in 25% of their low-income communities. In other words, if a state has less than 100 tracts identified as low-income communities, 25 qualify, he explained. The tracts are chosen based on statistics from the U.S. Census.<\/p>\n<p><a href=\"https:\/\/www.aurorasolar.com\/public-demo?aurora_blog_cta=image\"><img decoding=\"async\" class=\"aligncenter size-full wp-image-4805\" src=\"https:\/\/aurorasolar.com\/wp-content\/uploads\/2022\/05\/reduce-change-orders.png\" alt=\"\" width=\"1281\" height=\"421\" \/><\/a><\/p>\n<h3>Consider focusing on Puerto Rico<\/h3>\n<p><a href=\"https:\/\/www.bloomberg.com\/news\/articles\/2019-05-14\/puerto-rico-may-shift-some-u-s-aid-in-opportunity-zone-projects\" target=\"_blank\" rel=\"noopener noreferrer\">Puerto Rico<\/a> \u2014 which has been rebuilding its energy infrastructure in the wake of the devastation of Hurricane Maria \u2014 received special treatment, with 835 of 945 low-income tracts qualifying as opportunity zones.<\/p>\n<p>\u201cOf particular interest should be <a href=\"https:\/\/microgridknowledge.com\/100-percent-renewable-energy-puerto-rico\/\" target=\"_blank\" rel=\"noopener noreferrer\">Puerto Rico<\/a>, which after Hurricane Maria has made a concerted effort to promote alternative energy, especially solar energy,\u201d said Petra.<\/p>\n<p>Last year, the U.S. Department of Treasury certified over 8,700 individual census tracts as Qualified Opportunity Zones in 50 states, six territories and the District of Columbia, he said. About 35 million people live in these zones, which are established for 10 years.<\/p>\n<h3>Look for opportunity zones in rural areas<\/h3>\n<p>\u201cMost solar energy developments located in opportunity zones should qualify,\u201d said Petra. He added that \u201cDevelopers should consider rural areas, where over 23% of census tracts are located and land tends to be more available and cheaper.\u201d Solar developers should also consider opportunity zones in the states with the most sunshine, he noted.<\/p>\n<p>In order to qualify for the tax benefits, a Qualified Opportunity Fund must invest in a Qualified Opportunity Zone Business. A Qualified Opportunity Zone Business must be a trade or business in which substantially all (70%) of the tangible property is owned or leased in a Qualified Opportunity Zone, said Petra.<\/p>\n<p>Fifty percent or more of the business\u2019s total gross income must come from actively doing business in the Qualified Opportunity Zone. And at least 40% of the company\u2019s intangible property must be actively used in a Qualified Opportunity Zone. Intangible property includes non-material assets such as bank accounts, copyrights, stocks, patents, bonds, insurance policies, retirement benefit accounts, plus customer lists or trade secrets, all of which have a dollar value.<\/p>\n<p>Petra notes that the location of the business is especially important to qualifying for an enterprise zone. \u201cThe focus is on the location of the business, but a Qualified Opportunity Zone Business must meet other tests,\u201d including the requirement that the company must derive 50% of its gross income doing business in the Qualified Opportunity Zone,\u201d he said.<\/p>\n<p>It\u2019s important for solar businesses looking at the program to understand what\u2019s needed to qualify as an Opportunity Zone Business, he said. Spano agreed, noting that the zones can be confusing, so it\u2019s important to work with attorneys.<\/p>\n<h3>Solar opportunities with the ITC<\/h3>\n<p><span style=\"font-weight: 400;\">The Investment Tax Credit (ITC) is a US federal tax credit for those who adopt solar in all states within the US, including residential and <\/span><a href=\"https:\/\/aurorasolar.com\/blog\/making-sense-of-commercial-solar-what-you-need-to-know-about-ci\/\"><span style=\"font-weight: 400;\">commercial properties<\/span><\/a><span style=\"font-weight: 400;\">. This credit was an excellent incentive for many solar prospects to adopt solar. Initially, the ITC was scheduled to be reduced to 22% in 2023 and then disappear altogether for homeowners in 2024.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But as of Aug 16, 2022, the government passed the <\/span><a href=\"https:\/\/www.solarpowerworldonline.com\/2022\/08\/long-term-solar-itc-standalone-storage-direct-pay-inflation-reduction-act\/\"><span style=\"font-weight: 400;\">Inflation Reduction Act (IRA)<\/span><\/a><span style=\"font-weight: 400;\">, which increased the tax credit to 30% and extended the expiration of the ITC for 10 years.<\/span><\/p>\n<p>\u201cThe final benefit of the Qualified Opportunity Zones program is if the investor holds the investment for more than 10 years, any subsequent gain recognized escapes federal tax entirely,\u201d said Petra. (It is important to note, however, that a state may not follow the federal law and may tax the gain.) Overall, the tax benefits available to investors should translate to long-term, cheaper capital, he said.<\/p>\n<p>To date, most of the qualifying transactions in the zones have been in real estate, said Petra. \u201cGenerally, real estate projects are well suited&#8230; but as folks have gotten more comfortable with the program, other industries [like solar] have gained interest in the program.\u201d<\/p>\n<figure id=\"attachment_6936\" aria-describedby=\"caption-attachment-6936\" style=\"width: 600px\" class=\"wp-caption alignnone\"><a href=\"https:\/\/www.aurorasolar.com\/public-demo\/?aurora_blog_cta=image\"><img decoding=\"async\" class=\"wp-image-6936\" src=\"https:\/\/aurorasolar.com\/wp-content\/uploads\/2023\/01\/Demo-CTA-Visual-1024x366.jpg\" alt=\"\" width=\"600\" height=\"214\" srcset=\"https:\/\/aurorasolar.com\/wp-content\/uploads\/2023\/01\/Demo-CTA-Visual-1024x366.jpg 1024w, https:\/\/aurorasolar.com\/wp-content\/uploads\/2023\/01\/Demo-CTA-Visual-300x107.jpg 300w, https:\/\/aurorasolar.com\/wp-content\/uploads\/2023\/01\/Demo-CTA-Visual-768x274.jpg 768w, https:\/\/aurorasolar.com\/wp-content\/uploads\/2023\/01\/Demo-CTA-Visual-320x114.jpg 320w, https:\/\/aurorasolar.com\/wp-content\/uploads\/2023\/01\/Demo-CTA-Visual-816x291.jpg 816w, https:\/\/aurorasolar.com\/wp-content\/uploads\/2023\/01\/Demo-CTA-Visual-896x320.jpg 896w, https:\/\/aurorasolar.com\/wp-content\/uploads\/2023\/01\/Demo-CTA-Visual-448x160.jpg 448w, https:\/\/aurorasolar.com\/wp-content\/uploads\/2023\/01\/Demo-CTA-Visual-508x181.jpg 508w, https:\/\/aurorasolar.com\/wp-content\/uploads\/2023\/01\/Demo-CTA-Visual-100x36.jpg 100w, https:\/\/aurorasolar.com\/wp-content\/uploads\/2023\/01\/Demo-CTA-Visual-740x264.jpg 740w, https:\/\/aurorasolar.com\/wp-content\/uploads\/2023\/01\/Demo-CTA-Visual.jpg 1400w\" sizes=\"(max-width: 600px) 100vw, 600px\" \/><\/a><figcaption id=\"caption-attachment-6936\" class=\"wp-caption-text\">Want to learn more about opportunity zones? Click above to schedule a personalized demo.<\/figcaption><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>Federal opportunity zones, which offer tax benefits to qualifying businesses, are little known and not always well understood. But they can offer important advantages to solar companies, adding to solar tax benefits such as the Federal Investment Tax Credit (ITC).<\/p>\n","protected":false},"author":26,"featured_media":1684,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"post_topic":[49,14],"class_list":["post-677","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v18.4 (Yoast SEO v27.7) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Opportunity zones explained: A helpful solar incentive<\/title>\n<meta name=\"description\" content=\"Federal opportunity zones offer tax benefits to qualifying businesses. 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